Lecture 3: The Policy-Making Process PDF

Lecture 3 The Policy-Making Process Topics ◼ Economic rationale for government intervention ◼ Some basic concepts ◼ Philippine agricultural policy ◼ Nature of the policy-making process ◼ Dimensions of the policy process ◼ Role of economics/ag econ Economic Rationale for Government Intervention (...

Lecture 3 The Policy-Making Process Topics ◼ Economic rationale for government intervention ◼ Some basic concepts ◼ Philippine agricultural policy ◼ Nature of the policy-making process ◼ Dimensions of the policy process ◼ Role of economics/ag econ Economic Rationale for Government Intervention (Joseph Stiglitz 1987, others) Market failure – the market fails to achieve efficient allocation of resources ◼ Public goods ◼ Externalities ◼ Imperfect market information ◼ Various forms of market imperfections (output and input) 1) Provision of public goods ✓ Without government intervention, these goods would be less available since the market tends to under- provide them ✓ Public goods are non-rival and non-excludable Non-rival - the consumption of the good by one person does not prevent anyone from consuming that good (e.g., fresh air) Non-excludable - a good that is made available to one person is effectively made available to everyone (e.g., road and national defense) ✓ Lead to free riding, i.e. some consumers fail to pay for the public good ✓ Returns to potential suppliers will be less than what the whole society will be willing to pay collectively. As a result, less than optimal amount of the public good may be produced and made available to society. 2) Externalities (costs or benefits) that lead to over- or under-production of goods ✓ Externalities occur when an activity produces benefits and/or costs for other activities that are not directly priced into the market. Benefits or costs accrue to individuals or groups who are outside a particular market transaction; a third party is affected by a particular market transaction. ✓ A negative externality is external cost (a) upland farmers engaged in continuous cropping without conservation practices resulting in erosion (b) industries or firms which do not use water pollution controls (c) smoking in public places could cause illness to others ✓ A positive externality is external benefit (a) upland farmers who practice conservation measures (b) processing industries which adopt water treatment technologies (c) high taxes imposed on smokers improves health condition of non-smokers ✓ Left alone, the market will produce more upland and industrial goods with external costs and will produce less with external benefits than what is socially optimal ✓ Government may intervene to tax polluters and smokers (sin taxes) or subsidize conservation practices or compel industries to use water treatment technologies. Price S2 = MSC + MPC G S1 = MPC Pg Pf F D = MPB =MSB Qg Qf Quantity Equilibrium for a case with external cost  S = MPC = MSC Price G Pg Pf F D2 = MSB + MPB D1 = MPB Qf Qg Quantity Equilibrium for a case with external benefit 3) When there is imperfect information that prevents the market from operating efficiently. a) when sellers have information that buyers do not have (or vice-versa), a case of ‘asymmetry of information’, as when the product is of sub-standard quality that causes problems for the buyers - government may intervene by ensuring that proper labeling is adopted. b) when market information about demand, supply and price information is inadequate causing some bottlenecks in the marketing and distribution of products - government may implement a market information service (MIS) that will benefit the society as a whole through greater market transparency. c) when food safety standards are not adopted and food safety could be compromised; government may require product certification (GAP, GAHP, GAqP, GMP, HACCP) 4) When market leaders exercise undue market power (e.g., imperfect competition). ✓ barriers to entry such as high start up cost that prevent entry of competitors ✓ firms exercise predatory pricing (i.e., set very low price to drive out competitors) ✓ when there is monopoly power (less product is sold and at a higher price) ✓ when there is monopsony power (quantity is lower and producer receives a lower price) ✓ when farmers have very limited bargaining power with traders for various reasons Reasons for Government Intervention in Agriculture (Tarrant 1980) ◼ Poverty and income problems in LDCs ◼ International politics / diplomacy ◼ Nature of agricultural production – seasonality, cycles, lags, effects of natural factors, geographical dispersion, heterogeneity of farms ◼ Poor bargaining position of farmers in LDCs and problems of oversupply in DCs ◼ Consideration of consumers’ interest ◼ International trade considerations – BOP, disposal of farm surpluses  Some Definitions/Concepts - Policy ✓ a settled course of action that may be adopted by a government, institution, body, or individual (Halcrow 1953) ✓ the principles that govern action directed towards given ends and is concerned with three things – what we want (the ends), how we get it (the means), and who we are (the nature of organization or group concerned) (Boulding 1964) ✓ an action taken by the government in pursuit of certain aims (Kirschen 1964) ✓ the conscious and purposive pursuit of a course of action by a decision unit (e.g. government) to realize some goals; the pursuit of this course of action has implications or consequences in various fields of human activity (economic efficiency, income distribution, social institutions, conservation of resources, etc.) (Cochrane 1958) ✓ a high-level over-all plan embracing the general goals and acceptable procedures especially of a government body (Mayer and Greenwood 1981) Some Definitions/Concepts - Policy ✓ Economic policy – a course of action pursued by the government in the management of national economic affairs ✓ Agricultural and food policy – a subset of economic policy that deals with production, marketing and consumption of food and other farm products ✓ Food policy – the collective efforts of the government to influence the decision-making environment of food producers, food consumers, and food marketing agents in order to further social objectives (Timmer et al 1983) Some Definitions/Concepts - Policy ✓ National policies - usually in the form of laws enacted by the elected political representatives on behalf of the citizenry or special interest segments of the population and implemented through government programs ✓ The basic policy for the Philippine agricultural sector is embodied in Republic Act 8435 or the Agriculture and Fisheries Modernization Act (AFMA) of 1997 “An act prescribing urgent related measures to modernize the agriculture and fisheries sectors of the country in order to enhance their profitability, and prepare said sectors for the challenges of globalization through an adequate, focused, and rational delivery of necessary support services, appropriating funds therefore and for other purposes” Agricultural policy objectives (AFMA) 1) to modernize the A/F sectors by transforming these from resource-based to technology- based industry 2) to enhance profits and incomes of A/F sectors particularly the small farmers and fisherfolk by ensuring equitable access to assets, resources and services, and promoting higher-value crops, value-added processing, agribusiness activities, and agro-industrialization 3) to ensure the accessibility, availability and stable supply of food at all times Agricultural policy objectives (AFMA) 4) to encourage horizontal and vertical integration, consolidation and expansion of A/F activities and groups (cooperatives, etc.) to enable them to benefit from economies of scale and afford them stronger bargaining position 5) promote people empowerment by strengthening POs, NGOs, and cooperatives 6) to pursue market-driven approach to enhance the comparative advantage of A/F sectors in the world market 7) to induce the A/F sectors to ascend continuously in the value-added ladder and encourage processing Agricultural policy objectives (AFMA) 8) to adopt policies that will promote industry dispersal and rural industrialization 9) to provide social and economic adjustment measures that increase productivity and market efficiency while ensuring protection and preservation of the environment and equity for small farmers and fisherfolk 10) to improve the quality of life of all sectors  AFMA ◼ Specific plans of action are in terms of the various titles and chapters relating to marketing and support services such as credit, irrigation, other infrastructure (fishports, seaports, airports, communication, research and technology, postharvest facilities, public markets and abbatoirs, agricultural machinery); product standardization and consumer safety, human resource development; RDE; rural non-farm employment; and trade and fiscal incentives including the budget (amount, allocation and sources). ◼ Actual operationalization is in terms of programs and projects implemented by the Department of Agriculture  The Philippine Food Safety Act 2013 (Republic Act 10611) ❖ An act to strengthen the food safety regulatory system in the country to protect consumer health and facilitate market access of local food and food products, and for other purposes ❖ Basis is the 1987 Philippine Constitution…the State shall protect and promote the right to health of the people…protect consumers from trade malpractices and from substandard or hazardous products…and maintain a farm to fork food safety regulatory system Objectives ◼ Protect the public from food-borne and water- borne illnesses and unsanitary, unwholesome, misbranded or adulterated foods; ◼ Enhance industry and consumer confidence in the food regulatory system; and ◼ Achieve economic growth and development by promoting fair trade practices and sound regulatory foundation for domestic and international trade Key Provisions ◼ Delineate functions of food safety regulatory agencies (FSRAs) of the DA, DOH and DILG ◼ Coordinate the FSRAs through the Food Safety Regulation Coordinating Board (FSRCB) ◼ Capacitate the local government units to effectively perform their functions (permits for health and sanitation, monitoring of adherence to food safety standards) The Philippine Competition Act 2015 (RA 10667) ◼ An Act providing for a national competition policy prohibiting anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions, establishing the Philippine Competition Commission, and appropriating funds therefor ◼ Reflects the belief that competition 1) promotes entrepreneurial spirit, 2) encourages private investments, 3) facilitates technology development and transfer, and 4) enhances resource productivity Problems ◼ Ineffective implementation (poor capacity of implementing units, institutional weaknesses) ◼ Budget constraints ◼ Changing priorities, lack of continuity of programs Nature of the Policy-Making Process (Sison) ◼ Policy-making has a problem-solving orientation and involves the application of the scientific method of doing things. In general, policy design and analysis require knowledge of three things: 1) ‘where we are’ which defines the situation or setting 2) ‘where do we want to go’ which identifies the goals and objectives 3) ‘how to get there’ which involves determining the means of achieving the stated objectives  Nature of the Policy-Making Process ◼ As a process, policy-making has the following characteristics: a) organized and sequential – involves preparing a plan of action that has been carefully, logically and rationally conceived by policy-makers following a step-by-step procedure b) cyclical and continuous – after a policy is adopted and the programs are implemented, an evaluation of the result or outcome of policy is undertaken to determine the extent to which the objectives or goals have been attained/not attained. Policy-making continues as long as there are problems to be addressed and wants to be satisfied. c) varying levels of complexity – involves different levels of decision-making, and furthermore, depending on the objectives set forth may involve a particular region or the entire nation as a whole.  Dimensions of the Policy Process (Sison, nd) 1) The identification of problem or relevant issues - there is a felt need to move from the current situation to a new or desired position; obstacles in defining the problem: one’s own value system, biases and prejudices 2) Defining the policy objectives - quite complex since society itself is composed of diverse individuals or groups having varying priorities and concerns - general societal goals include growth, stability, freedom, security, justice, ecological preservation, among others - objectives must be well-understood and clearly stated; important and relevant; feasible within the specified limits of time, money and other resources; ranked according to their degree of importance in order to facilitate the allocation and distribution of resources for their attainment; may be complementary; must consider possible conflicts; must have some time perspective  Dimensions of the Policy Process 3) Gathering of relevant factual conditions and information - for better understanding of the problem, issues and objectives to be pursued - consider historical, current and future conditions - helps identify possible alternatives for the solution of the problem 4) Determining and understanding the interrelationships of influential factors, model building, and analysis of gathered facts - knowledge of relevant economic theories that serve as guide on how to approach a particular problem - analytical tools for determining consequences of alternative policies Dimensions of the Policy Process 5) Identification, design and analysis of alternative solutions or policies, including analysis of the consequences of policies 6) Decision-making and adoption of policies and programs - consider economic criteria and other factors (technical, social acceptability, preparation of institutions) - economic criteria may include total benefit/cost ratio, net social benefit, net government cost, distributional impacts, savings on foreign exchange, etc. - decision may turn out to be political in nature; policy advocacy from various groups affects policy decisions  Dimensions of the Policy Process 7) Policy and program implementation - strategies and detailed activities (work and financial plan, targets, monitoring scheme) - support for implementing agencies 8) Monitoring and evaluation (M&E) - provide information on progress (accomplishments versus targets) – determine output and outcome indicators - impacts: short-term, medium-term and long- term – determine impact indicators - feedback to implementors and policy-makers - depending on result of M&E, proceed to step 1 as necessary (possible modification, continuation, or discontinuation)  8 Monitoring and Evaluation Policy and Program Implementation 7 Decision-making and Adoption 6 of Policies and Programs THE POLICY-MAKING PROCESS Identification, Design and 5 Analysis of Policy Options Interrelationships of Factors, 4 Model-building and Analysis of Gathered Facts Gathering of Factual Conditions 3 and Information Defining the Policy Objectives 2 1 Problem Identification Institutions involved in policy-making ◼ Based on steps 1 through 5, a policy position or proposal is prepared; could be initiated by various interest groups (private or public) and is formally taken up by the legislative body (Congress) in coordination with the executive branch of the government. ◼ Once approved and enacted into law (step 6), the executive branch acts as the implementing agency (step 7). ◼ During the entire process, and particularly during implementation, some conflicts and disputes may arise. These are settled by the judicial branch that interprets the provisions of the law. ◼ Hence, all branches of the government including the various interest groups and civil society are involved  Role of economics – conduct of relevant policy research 1) Provide insights into the origin of economic problems; insight can be traced from the aggregate or macro level to the individual firm or micro level 2) Assist in developing policy and program alternatives for solving problems 3) Provide models and tools that can be used to analyze the consequences of policies (ex-ante or ex-post) that are critical to informed policy decision-making; during M&E stage to help detect problems, identify magnitude of specific relationships, fine tune programs and as guide for future decisions. ◼ Willard Cochrane (1958), “The Economist as Policy Adviser” in Farm Prices: Myth and Reality - Difference between economics and policy, economizing (economic principles, one goal that is uniquely determined through models) and policy processes (broader and more inclusive, decision unit seeks to formulate a course of action that best satisfies the unit with respect to the totality of human activities; involves compromise; method is more varied and less precise, discussions are newsy, involve personalities and pressure group tactics - How decision units arrive at a particular economic policy (human values and policy) - Role of economists (social scientist) - Value system of the author and how it has shaped US farm policy